Debt yields track T-bond auction, US Treasuries

DEBT YIELDS at the secondary market moved lower last week following the auction of 10-year Treasury bonds as well as local government securities (GS) tracking the movement of US Treasuries with investors being on a risk-off mode due to ongoing US-China trade tensions.

On average, GS yields fell by 13.6 basis points (bp) week-on-week, according to the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of May 31 published on the Philippine Dealing System’s website.

“Local GS yields took their cue from the movement of US Treasury yields, which continued to dip due to general risk-off tone stemming from the heightened trade tensions between the US and China,” said ING Bank NV Manila Branch senior economist Nicholas Antonio T. Mapa said in an e-mail.

Mr. Mapa added that dovish comments from Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno regarding cuts to both policy rates and banks’ reserve requirement ratio “also gave impetus for bonds to rally.”

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion was of the same assessment, adding that market players also responded to the impact of the oversubscribed 10-year Treasury bonds (T-bond) auction last week.

“In general [last] week, yields were down. However, players have trimmed their positions and try to lock some gains toward the end of the week,” Mr. Asuncion said in a separate e-mail.

“The market also factored in the impact of the recent [RRR] cut,” Mr. Asuncion added.

The central bank slashed the RRR of lenders by a percentage point effective last Friday to 17% for universal and commercial banks, 7% for thrift banks, and 4% for rural and cooperative banks.

The BSP earlier said a percentage point cut in big banks’ RRR will release P90-100 billion into the financial system, while another P22 billion will be released by a 100 bps cut in reserve ratios of smaller lenders.

Further reductions will be implemented to eventually bring big banks’ and thrift banks’ RRR to 16% and 6% by July, respectively.

Meanwhile, the Bureau of the Treasury raised P20 billion as planned from its 10-year T-bond offer last Tuesday after receiving tenders amounting to P65.84 billion. The 10-year debt notes, which carry a coupon of 6.875%, fetched an average rate of 5.644%, 31 bps lower than the 5.954% fetched when the bonds were last offered on April 11.

On the external front, Chinese state media last Wednesday implied China could restrict rare earth sales to the United States, stoking fears about Beijing’s role as a supplier as around 80% of rare earths imported by the United States comes from China. This came following Washington’s move to blacklist Chinese telco giant Huawei Technologies Co. Ltd. earlier last month.

At the close of trading last Friday, GS yields went down across the board. The three-month, six-month, and one-year debt papers were down by 6.1 bps, 12.5 bps, and 22.5 bps, respectively, to fetch 5.298%, 5.569%, and 5.670%.

Rates of the two-, three-, four-, five-, and seven-year T-bonds likewise declined by 14.5 bps (5.529%), 14.6 bps (5.527%), 15 bps (5.532%), 15.5 bps (5.541%), and 15.7 bps (5.559%), respectively.

The 10-, 20-, and 25-year papers also went down by 16.1 bps, 11.6 bps, and 5.2 bps, respectively, to yield 5.548%, 5.751%, and 5.962%.

Moving forward, analysts pointed to the government’s release of May inflation data on Wednesday as a driver for this week’s trading.

A BusinessWorld poll of 10 economists conducted late last week showed a 3% median headline inflation estimate for May, which if realized will be at par with the pace recorded in April and slower than the 4.6% rate in May 2018. This will also be within the BSP Department of Economic Research’s 2.8%-3.6% estimate range for May.

“It is expected that yields will be on the downward trend,” UnionBank’s Mr. Asuncion said.

ING Bank’s Mr. Mapa was of the same view, adding that market players “will continue to monitor global developments.” — Kimani Eros S. Franco